Amazon’s Q4 2018 results reported USD72.92 billion in revenue, with net sales rising 20% compared the same period a year ago. Profit rose 63% to USD3 billion. However, this was the slowest growth period for Amazon since the start of 2015. Performance has been dampened by weakening International growth. While substantial white space exists for Amazon internationally, the eCommerce giant is facing heavy headwinds in once-prosperous markets.
- In Q4, sales grew 15%. YoY growth was 21% vs. 23% in 2017
- International sales make-up 28% of net sales, vs. 30% in 2017
- International losses narrowed to USD2.14 billion vs. USD3.06 billion in 2017
Key considerations for brands and retailers
- New opportunity for domestic players in India - Amazon faces regulatory changes to protect product pricing for local businesses. This is creating a huge opportunity for 3P sellers to migrate to domestic eCommerce players i.e. Flipkart. Winning back consumers once it has right-sized its structure may prove challenging.
- Amazon no longer has technological competitive advantage - Whereas 10 years ago, Amazon’s digital and fulfilment capabilities meant it could always win on shopper convenience, upscaling operations to offer equivalent service levels is no longer beyond the reach of a retailer prepared to fund digital transformation. What’s more, those retailers can also call on a host of rival tech expertise to upgrade their business, be that Google, Microsoft or Alibaba. Simply put, Amazon no longer has the killer edge on technology that made it so feared by competitors.
- Gaining traction in new markets proving a struggle – Amazon is struggling to gain traction in Southeast Asia. The company’s IP used to be technological solutions, but competitors are quickly catching up and failing to get traction in key markets such as China could prove costly. Alibaba establishing its ecosystem in Russia and CEE is another potential threat to white space opportunities.
Suddenly, Amazon India assumes new importance
India is now crucial to Amazon’s future. Its North American dominance is unquestioned, but long-term growth will only be achieved by being positioned to take advantage of fast-growth digital economies, notably in Asia and Latin America. Up against immense pressures in China, and unable to drive rapid growth in the sedentary Japanese market, India and Latin America have assumed vital importance to really unlock growth.
However, newly enforced regulations on third party vendor ownership are undoubtedly behind the conservative Q1 guidance figures. When they came into effect from 1 February 2019, Amazon Echo speakers, its Presto-branded home cleaning goods and other Amazon Basics products all reportedly vanished from its India portal. The goods are supplied by Cloudtail and Appario, sellers in which Amazon holds a stake and, as such, are no longer allowed to be offered due to the conflict of interest between platform and seller. It has long been argued by smaller Indian players that eCommerce giants’ relationships with 3P vendors allowed them to offer deep discounts and amounted to unfair trading practices.
While the new law also disadvantages its main rival, Walmart-owned Flipkart, to a lesser extent, it will entail massive restructuring for Amazon. For the short- and medium-term it will likely mean its ability to compete on price is severely compromised, something that runs contrary to Amazon’s foundational ethos.
Headaches in Europe, despite efforts to grow omnichannel experience
Black Friday proved successful in Europe, activating consumer spend in the run up to Christmas. However, even in Europe, questions over its tax status are a constant background noise, with the possibility of eventual EU-wide action on its practices something that cannot be ignored. In its #2 global market of Germany, Amazon endured a torrid time in Q4, with its 3P marketplace practices being scrutinised by the powerful Bundeskartellamt regulatory body, its Dash buy buttons ruled as being contrary to consumer protection standards and seemingly endless conflicts with the Verdi trade union disrupting FC activity.
Meanwhile, expansion of Amazon Fresh Germany after a much-delayed 2017 launch has seemingly stalled with only Berlin and Munich served at present and local supermarket players like REWE determined to go head-to-head for eGrocery primacy. Amazon’s grocery ambitions in France are also challenged by the omnichannel ambition of big players like Carrefour, Leclerc and Intermarché, although its collaboration with Casino allows it some skin in the game.
Troubles down under in Australia
International operational pain-points have also been exemplified by its debut in Australia a year ago, where it has been simultaneously described as a disruptor or a disappointment. Amazon did itself few favours by restricting Australia shopper access to its US platform in July in a dispute over GST collection. This was lifted in November, but not after a degree of brand damage had been done.
What it has done is energise incumbent market players like Woolworths and Coles to raise their digital game hugely in response. This illustrates a central problem for Amazon expansion in 2019 compared with a decade ago. While disruption, even desperation, remains the default reaction of retailers in any market Amazon targets, local players are now being far more proactive in their response.
The search is on for new white spaces
Small wonder, then, that Amazon has been quietly nurturing new markets, such as the potential big bet for the future that is Brazil, where in recent weeks it finally began home fulfilment of 1P/3P orders in from its new São Paulo FC. It is also making moves in other Latam countries like Chile, Argentina and Colombia, though the market potential imbalance among Latam markets makes the region unlikely to be a major focus for a while, unless Amazon makes a major move such as acquiring leading regional platform MercadoLibre.
Middle East Opportunity
The current area of interest is the Middle East, where Amazon already owns top-ranked portal Souq.com and just last week revealed it would introduce its self-operated 3P marketplace in UAE and Saudi Arabia, a move that appears to work to the detriment of Souq, which it only acquired two years ago. That ownership has evidently allowed Amazon to build a comprehensive regional consumer and market overview and what it sees is evidently enough to trigger development of a Middle East power base.
eCommerce development in the region has been fairly limited, making this an easy win for Amazon, given a lack of direct competition. Dubai is emerging as a major global centre for cross-border trade (Alibaba is building a vast hub there), so from a geographical and geopolitical perspective, it makes sense. There may also be a hint of concern at Alibaba’s future-focused recent incursions into Turkey and Pakistan prompting the urge to have a genuine footprint in the region and a base from which it can better support its fledging Turkish operation. Here, though, the platform will now face heavy competition from Alibaba, with AliExpress officially launching in Turkey this week.
Concentration on the Middle East puts into sharper relief Amazon’s struggle to win in Southeast Asia. Amazon recently forged trade ties with Vietnam while September saw it open an AWS data centre in Indonesia, but so far its presence remains limited to Singapore while rivals like JD.com, Alibaba and Google are building meaningful footprints in key growth markets like Thailand, Indonesia and Malaysia. Crucially, these companies are forging their own fast fulfilment networks via on-demand delivery providers like Go-Jek, Grab and Ele.me, again defraying one of Amazon’s core strengths. Of all its international challenges, Southeast Asia promises to be the most daunting.
Projections for 2019
Amazon has been more focused than before on boosting profitability, with revenue streams largely coming from AWS and AMS. New regulations for the eCommerce marketplace in India are undoubtedly affecting profit forecasts, which will force Amazon’s hand to evolve its business model in the market. Historically Amazon has had low profit forecasts, as it re-invests in technology, warehouses, infrastructure and, ultimately, the Prime ecosystem.